From the Securities Lending Trading Desk

Stock prices lining above world map

There is strong demand for cash elections as a result of the merger between Tyco International and Johnson Controls, Inc. A decline in orders due to sluggish economy has led Korean shipbuilders to raise a total of 8.4 trillion Won by selling shares and assets. In Europe, Fringerprint Cards AB has been in focus for refinancing as borrows are becoming expensive due to the share price rally.

Below please find the August 30 edition of From the Trading Desk, which provides timely commentary about top security earners, revenue drivers and other factors influencing the securities lending market from the BBH Securities Lending Trading Team.

Americas 

The merger between Tyco International PLC and Johnson Controls, Inc. (JCI) is resulting in strong demand for cash elections. This merger is expected to be completed on 9/2, and currently the terms heavily favor the stock election for JCI holders. This merger is another example of companies looking for more favorable tax domiciles. According to reports, this JCI/TYC has been specifically structured so that the company could benefit from a $150 million tax break whereby Tyco would buy out Glendale-based Johnson Controls shares and move its headquarters to Tyco’s headquarters in Cork, Ireland.

We have seen strong demand for Yirendai Ltd. (YRD) as bearish investors question if the recent rally is overdone. On 8/18, YRD closed at a 52 week high and had nearly doubled since 7/18. This rally is especially painful for shorts, however there has been some relief as the share price has retreated roughly 35% from that high. With fee levels and the share price on the rise, bearish positions on this name have been especially costly for shorts but lucrative for long holders.

Asia Pacific 

Korean shipbuilders are expected to raise a combined total of 8.41 trillion Won through sales of shares and assets this year as orders decline in a challenging global economy. Samsung Heavy, Hyundai Heavy Industries Co. and Daewoo Shipbuilding & Marine Engineering Co., the world’s top three shipyards, have been hurt by a slowing global economy and a sharp fall in oil prices that led customers to defer or stop orders. Samsung Heavy Industries Co. reported its first annual loss in 11 years and announced plans to raise 1.1 trillion won ($985 million) from a sale of new shares. We continue to see strong long term lending demand for Korean shipbuilders.

One of Hong Kong’s last remaining independent banks reported disappointing first half results last week as the slowdown in the Chinese economy continues to take effect. Bank of East Asia, which is the second largest foreign bank operating in mainland China, reported a 38% slump in year-on-year first half profits due to a surge in loan impairments as a result of the worsening bad debt environment in both mainland China and Hong Kong. BEA also projected a negative outlook for the remainder of the year as it cited slower growth in the manufacturing, property and retail sectors will further compression of margins. We continue to witness strong securities lending demand for BEA which is also grappling with a legal challenge by Elliot Management, the activist hedge fund, which alleges that the bank acted improperly in diluting minority shareholders’ interests and entrenched management control.

Europe 

Fee levels remain elevated for Outotec OYJ and Vallourec SA as industrial suppliers to the oil sector are expected to have lower earnings this year as customers demand price reductions. Since reaching a six-month high of $5.00 on 7/25, Outotec has fallen roughly 20%. In July, the company reported a loss in the second quarter due to low metal prices and China’s uncertain growth outlook. Vallourec SA, despite a share price rally, has been a long term focus as they have sales exposure of about 20-25% to the Middle East, where there is significant price pressure for their products. As uncertainty remains high we are also seeing strong demand in the sector.

Fingerprint Cards AB has been a focus of refinancing as the share price rally has made borrows increasingly expensive. Fingerprint Cards AB share price has been volatile over the past year. Though the share price has overall traded higher on bullish sentiment for biometric devices, the price has been sensitive to weaker than expected sales and earnings. Fundamental demand remains strong as Fingerprint looks to remain competitive in a rapidly developing market.